SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended September 30, 2001
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File 333-78445
PENNSYLVANIA COMMERCE BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
Pennsylvania 25-1834776
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
100 Senate Avenue, P.O. Box 8599, Camp Hill, PA 17001-8599
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(Address of principal executive offices)
(717) 975-5630
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 1,772,629 Common shares
outstanding at 11/09/01
Transitional Small Business Disclosure Format (check one): Yes No X
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PENNSYLVANIA COMMERCE BANCORP, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited)...............................3
September 30, 2001, and December 31, 2000
Consolidated Statements of Income (Unaudited).........................4
Three months ended September 30, 2001 and September 30, 2000
Nine months ended September 30, 2001 and September 30, 2000
Consolidated Statements of Stockholders' Equity (Unaudited)...........5
Nine months ended September 30, 2001 and September 30, 2000
Consolidated Statements of Cash Flows (Unaudited).....................6
Nine months ended September 30, 2001, and September 30, 2000
Notes to Consolidated Financial Statements (Unaudited)................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................21
Item 6a. Exhibits
Exhibit 11...........................................................21
Item 6b. Reports on Form 8-K..................................................21
Signatures...........................................................23
2
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
=============================================================================================================================
September 30, December 31,
( in thousands, except share amounts) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Assets Cash and due from banks $ 32,313 $ 16,849
Federal funds sold 11,800 22,800
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Cash and cash equivalents 44,113 39,649
Securities, available for sale at fair value 108,789 92,921
Securities, held to maturity at cost
(fair value 2001: $81,681; 2000: $33,661 ) 80,388 33,812
Loans, held for sale
(fair value 2001: $6,511; 2000: $5,409 ) 6,454 5,329
Loans receivable :
Real estate:
Commercial mortgage 141,736 127,931
Construction and land development 31,057 30,776
Residential mortgage 41,301 41,314
Tax-exempt 2,662 2,786
Commercial business 42,866 31,490
Consumer 31,352 30,691
Lines of credit 33,745 25,264
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324,719 290,252
Less: Allowance for loan losses 4,451 3,732
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Net loans receivable 320,268 286,520
Premises and equipment, net 19,986 16,637
Accrued interest receivable 3,205 2,936
Other assets 2,085 2,282
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Total assets $ 585,288 $ 480,086
=============================================================================================================================
Liabilities Deposits :
Noninterest-bearing $ 99,637 $ 85,577
Interest-bearing 438,401 361,006
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Total deposits 538,038 446,583
Accrued interest payable 976 834
Other liabilities 1,329 1,001
Long term debt 13,000 5,000
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Total liabilities 553,343 453,418
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Stockholders' Preferred stock - Series A noncumulative;
Equity $10.00 par value; 1,000,000 shares authorized;
40,000 shares issued and outstanding 400 400
Common stock - $1.00 par value; 10,000,000 shares authorized;
issued and outstanding - 2001: 1,772,629; 2000: 1,749,045 1,773 1,749
Surplus 21,426 20,861
Retained earnings 7,434 4,334
Accumulated other comprehensive income (loss) 912 (676)
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Total stockholders' equity 31,945 26,668
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Total liabilities and stockholders' equity $ 585,288 $ 480,086
=============================================================================================================================
See accompanying notes .
3
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
====================================================================================================================================
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------------------------------------
(in thousands, except per share amounts) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Loans receivable, including fees:
Income Taxable $ 6,728 $ 6,078 $ 19,838 $16,384
Tax - exempt 28 41 98 61
Securities :
Taxable 2,824 2,036 7,833 5,942
Tax - exempt 27 14 67 30
Federal funds sold 106 296 509 440
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Total interest income 9,713 8,465 28,345 22,857
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Interest Deposits 3,831 3,801 11,899 9,883
Expense Other borrowed money 2 0 13 42
Long-term debt 145 138 422 162
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Total interest expense 3,978 3,939 12,334 10,087
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Net interest income 5,735 4,526 16,011 12,770
Provision for loan losses 405 255 1,005 765
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Net interest income after provision for loan losses 5,330 4,271 15,006 12,005
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest Service charges and other fees 1,420 1,187 4,182 3,291
Income Other operating income 124 109 369 324
Gain on sale of securities available for sale 0 0 52 0
Gain on sale of loans 52 150 314 349
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Total noninterest income 1,596 1,446 4,917 3,964
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest Salaries and employee benefits 2,411 1,939 7,143 5,513
Expenses Occupancy 542 460 1,608 1,304
Furniture and equipment 335 293 1,043 772
Advertising and marketing 410 363 1,190 1,203
Data processing 351 246 973 715
Postage and supplies 228 170 638 492
Audits, regulatory fees and assessments 102 89 299 259
Other 774 671 2,271 1,743
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Total noninterest expenses 5,153 4,231 15,165 12,001
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Income before income taxes 1,773 1,486 4,758 3,968
Provision for federal income taxes 592 472 1,586 1,318
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Net income $ 1,181 $ 1,014 $ 3,172 $ 2,650
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Net income per common share : Basic $ 0.66 $ 0.57 $ 1.77 $ 1.49
Diluted 0.59 0.53 1.60 1.40
===================================================================================================================================
See accompanying notes .
4
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Unaudited)
================================================================================================================================
Accumulated
Other
Preferred Common Retained Comprehensive
( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance : December 31, 1999 $ 400 $ 1,644 $ 18,196 $ 3,137 $ (2,999) $ 20,378
Comprehensive income:
Net income - - - 2,650 - 2,650
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - 983 983
---------
Total comprehensive income 3,633
Dividends declared on preferred stock - - - (60) - (60)
Common stock issued under stock option plans - 5 24 - - 29
Income tax benefit of stock options exercised - - 23 - - 23
Common stock issued under employee stock
purchase plan - - 5 - - 5
Proceeds from issuance of common stock
in connection with dividend reinvestment
and stock purchase plan - 7 140 - - 147
- -----------------------------------------------------------------------------------------------------------------------------
September 30, 2000 $ 400 $ 1,656 $ 18,388 $ 5,727 $ (2,016) $ 24,155
=============================================================================================================================
Accumulated
Other
Preferred Common Retained Comprehensive
( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance : December 31, 2000 $ 400 $ 1,749 $ 20,861 $ 4,334 $ (676) $ 26,668
Comprehensive income:
Net income - - - 3,172 - 3,172
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - 1,588 1,588
---------
Total comprehensive income 4,760
Dividends declared on preferred stock - - - (60) - (60)
Common stock issued under stock option plans - 14 133 - - 147
Income tax benefit of stock options exercised - - 75 - - 75
Common stock issued under employee stock
purchase plan - - 8 - - 8
Proceeds from issuance of common stock
in connection with dividend reinvestment
and stock purchase plan - 10 337 - - 347
Other - - 12 (12) - -
- -----------------------------------------------------------------------------------------------------------------------------
September 30, 2001 $ 400 $ 1,773 $ 21,426 $ 7,434 $ 912 $ 31,945
=============================================================================================================================
See accompanying notes .
5
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
================================================================================================================================
Nine Months Ended
September 30,
( in thousands ) 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Operating
Activities Net income $ 3,172 $ 2,650
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,005 765
Provision for depreciation and amortization 1,055 866
Deferred income taxes (194) (249)
Amortization of securities premiums and accretion of discounts, net 164 149
Net gain on sale of securities available for sale (52) 0
Proceeds from sale of loans 39,619 14,766
Loans originated for sale (40,509) (13,659)
Gain on sales of loans (314) (349)
Stock granted under stock purchase plan 8 5
Decrease (increase) in accrued interest receivable and other assets (622) (1,078)
Increase in accrued interest payable and other liabilities 470 748
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Net cash provided by operating activities 3,802 4,614
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Investing
Activities Securities held to maturity :
Proceeds from principal repayments and maturities 13,169 1,802
Purchases (59,750) (4,955)
Securities available for sale :
Proceeds from principal repayments and maturities 28,899 4,747
Proceeds from sales 7,497 0
Purchases (49,965) (12,268)
Proceeds from sale of loans receivable 3,255 4,196
Net increase in loans receivable (37,928) (66,675)
Purchases of premises and equipment (4,404) (1,865)
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Net cash (used) by investing activities (99,227) (75,018)
- --------------------------------------------------------------------------------------------------------------------------------
Financing
Activities Net increase in demand deposits, interest checking,
money market and savings deposits 90,165 67,265
Net increase (decrease) in time deposits 1,290 11,537
Proceeds from issuance of Trust preferred securities 8,000 5,000
(Decrease) in borrowed money 0 (8,300)
Proceeds from common stock options exercised 147 29
Proceeds from common stock purchase and dividend reinvestment plans 347 147
Cash dividends on preferred stock (60) (60)
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Net cash provided by financing activities 99,889 75,618
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Increase (decrease) in cash and cash equivalents 4,464 5,214
Cash and cash equivalents at beginning of year 39,649 27,490
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Cash and cash equivalents at end of period $ 44,113 $ 32,704
=============================================================================================================
See accompanying notes .
6
PENNSYLVANIA COMMERCE BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
Note 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Pennsylvania
Commerce Bancorp, Inc. ("the Company") and its wholly owned subsidiaries
Commerce Bank/Harrisburg, N.A. ("the Bank"), Commerce Capital Harrisburg Trust
I, and Commerce Capital Harrisburg Trust II. All material intercompany accounts
and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and are of a normal,
recurring nature. Operating results for the nine month period ended September
30, 2001, are not necessarily indicative of the results that may be expected for
the year ended December 31, 2001.
The Company may, from time to time, make written or oral "forward-looking
statements", including statements contained in the Company's filings with the
Securities and Exchange Commission (including the annual report and Form 10-K
and the exhibits thereto), in its reports to stockholders and in other
communications by the Company, which are made in good faith by the Company
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates, and intentions, that are subject to significant risks and
uncertainties and are subject to change based on various factors (some of which
are beyond the Company's control). The words may, could, should, would, believe,
anticipate, estimate, expect, intend, plan, and similar expressions are intended
to identify forward-looking statements. The following factors, among others
could cause the Company's financial performance to differ materially from that
expressed in such forward-looking statements: the strength of the United States
economy in general and the strength of the local economies in which the Company
conducts operations; the effects of, and changes in, trade, monetary and fiscal
policy, including interest rate policies of the Board of the Federal Reserve
System; inflation; interest rate, market and monetary fluctuations; the timely
development of competitive new products and services by the Company and the
acceptance of such products and services by customers; the willingness of
customers to substitute competitors' products and services and vice versa; the
impact of changes in financial services laws and regulations (including laws
concerning taxes, banking, securities, and insurance); technological changes;
future acquisitions; the expense savings and revenue enhancements from
acquisitions being less than expected; the growth and profitability of the
Company's noninterest or fee income being less than expected; unanticipated
regulatory or judicial proceedings; changes in consumer spending and saving
habits; and the success of the Company at managing the risks involved in the
foregoing.
7
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statements, whether written or oral, that may be made from time to time by or on
behalf of the Company. For further information, refer to the financial
statements and footnotes thereto included in the Pennsylvania Commerce Bancorp,
Inc., Annual Report for the year ended December 31, 2000.
Note 2. SIGNIFICANT ACCOUNTING POLICIES
Stock Dividends and Per Share Data
On January 19, 2001, the Board of Directors declared a 5% stock dividend on
common stock outstanding, paid on February 16, 2001, to stockholders of record
on February 2, 2001. Payment of the stock dividend resulted in the issuance of
83,492 additional common shares and cash of $6,403 in lieu of fractional shares.
The effect of the 5% common stock dividend has been recorded as of December 31,
2000.
Recently Issued FASB Statements
In June of 2001, the Financial Accounting Standards Board issued Statement 143,
"Accounting for Asset Retirement Obligations", which addresses the financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
Statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. This
Statement will become effective for the Company on January 1, 2003.
In August of 2001, the Financial Accounting Standards Board issued Statement
144, "Accounting for the Impairment of or Disposal of Long-Lived Assets". This
Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions for the disposal of a segment of a business". This Statement also
amends ARB No. 51, "Consolidated Financial Statements". The provisions of this
Statement will be effective for the Company on January 1, 2002.
Adoption of these statements is not expected to have a material impact on the
Company's financial condition or results of operations.
Note 3. COMMITMENTS AND CONTINGENCIES
The Company is subject to certain routine legal proceedings and claims arising
in the ordinary course of business. It is management's opinion that the ultimate
resolution of these claims will not have a material adverse effect on the
Company's financial position and results of operations.
8
Future Branch Facilities
The Company purchased the parcel of land at 3109 Cape Horn Road, Red Lion,
Pennsylvania, and constructed a full-service branch office on this land. The
Company held Grand Opening Ceremonies for this branch in October 2001.
The Company has entered into an agreement to purchase the building at 101 North
Second Street, City of Harrisburg, Dauphin County, Pennsylvania and plans to
construct a full-service branch office in this building. The Company plans Grand
Opening Ceremonies for this branch in first quarter 2002.
The Company has also amended an existing lease (originally dated February 1996)
at the Operations Center located at 3 Crossgate Drive, Mechanicsburg,
Pennsylvania. The amendment expands the square footage under this lease from
10,668 square feet to 12,864 square feet. The amendment became effective May 1,
2001 and has similar terms and options as the original lease. Additional annual
rent payments equal $25,024. Rent is subject to change on terms set forth in the
agreement.
Note 4. TRUST CAPITAL SECURITIES
On September 28, 2001, the Company issued $8.0 million of 10.00% Trust Capital
Securities through Commerce Harrisburg Capital Trust II, a newly formed Delaware
business trust subsidiary of the Company. Proceeds of this offering were
earmarked for additional capitalization of Commerce Bank/Harrisburg, N.A., the
Company's wholly-owned banking subsidiary. At September 30, 2001, $5.3 million
of these $8.0 million of Trust Capital Securities issued qualify as Tier 1
capital and the remaining $2.7 million qualifies as Tier 2 capital for
regulatory capital purposes.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Company's balance sheets and
statements of income. This section should be read in conjunction with the
Company's financial statements and accompanying notes.
OVERVIEW
Net income for the quarter increased 16% to $1.2 million as compared to $1.0
million for the third quarter of 2000 and total revenues increased by 23% to
$7.3 million for the quarter. Diluted net income per common share increased 11%
to $0.59 from $0.53 per share in the third quarter a year ago (after adjusting
for a 5% common stock dividend paid in February 2001). At September 30, 2001,
the Company had total assets of $585.3 million, total loans (including loans
held for sale) of $331.2 million, and total deposits of $538.0 million.
RESULTS OF OPERATIONS
Average Balances and Average Interest Rates
Interest earning assets averaged $506.3 million for the third quarter of 2001 as
compared to $412.4 million for the same period in 2000. Approximately $50.0
million, or 53%, of this increase was in average loans outstanding and $43.9
million, or 47%, was in average securities and federal funds sold. The yield on
earning assets for the third quarter of 2001 was 7.61%, a decrease of 61 basis
points (bps) from the comparable period in 2000. This decrease was mainly the
result of eight decreases in short-term interest rates totaling 350 bps by the
Federal Reserve Board during the first nine months of 2001.
The growth in interest earning assets was funded primarily by an increase in the
average balance of deposits of $96.4 million. Interest-bearing liabilities
increased from $342.1 million during the third quarter of 2000 to $419.1 million
during the third quarter of 2001. Average savings deposits increased $27.1
million over third quarter a year ago, average public funds deposits increased
$26.8 million and average time deposits increased by $13.4 million. Also,
average non-interest bearing demand deposits increased by $20.4 million.
The average rate paid on these liabilities for the third quarter of 2001 was
3.77%, a decrease of 81 basis points from the comparable period in 2000. The
Company's aggregate cost of funding sources was 3.12% for the third quarter of
2001, a decrease of 71 basis points from the prior year. This is the result of a
decrease in the average rates paid on all interest bearing deposits.
Interest earning assets for the first nine months averaged $483.6 million versus
$375.3 for the comparable period in 2000. The yield on earning assets decreased
to 7.84% during the first nine months of 2001, from 8.13% for the first nine
months of 2000.
The level of average interest-bearing liabilities increased from $310.6 million
for the first nine months of 2000 to $401.8 million for the first nine months of
2001. The Company's cost of funds for the first nine months of 2001 was 3.41%,
down 18 basis points from 3.59% for the comparable period in the prior year.
10
Net Interest Income and Net Interest Margin
Net interest income is the difference between interest income earned on assets
and interest expense incurred on liabilities used to fund those assets. Interest
earning assets primarily include loans and securities. Liabilities used to fund
such assets include deposits, borrowed funds, and long-term debt. Changes in net
interest income and margin result from the interaction between the volume and
composition of earning assets, related yields and associated funding costs.
Interest income increased by $1.2 million, or 15%, over the third quarter of
2000. Interest expense for the third quarter of 2001 increased by $39,000, or
1%, compared to the third quarter of 2000.
Net interest income for the third quarter of 2001 increased by $1.2 million, or
27%, over the same period in 2000. Changes in net interest income are frequently
measured by two statistics: net interest rate spread and net interest margin.
Net interest rate spread is the difference between the average rate earned on
earning assets and the average rate incurred on interest-bearing liabilities.
Net interest margin represents the difference between interest income, including
net loan fees earned, and interest expense, reflected as a percentage of average
earning assets. The Company's net interest rate spread was 3.84% during the
third quarter of 2001 compared to 3.64% during the same period of the previous
year. The net interest margin increased by 10 basis points from 4.39% for the
third quarter 2000 to 4.49% during the third quarter of 2001.
For the first nine months ended September 30, 2001, interest income increased by
$5.5 million, or 24%, over the same period in 2000. Interest expense for the
first nine months of 2001 totaled $12.3 million, an increase of $2.3 million, or
22%, over the first nine months of 2000.
Net interest income for the first nine months of 2001 increased by $3.2 million,
or 25%, over the same period in 2000. The Company's net interest margin
decreased from 4.54% for the first nine months of 2000, to 4.42% for the first
nine months of 2001.
Noninterest Income
Noninterest income for the third quarter of 2001 increased by $150,000, or 10%,
over the same period in 2000. Recurring core noninterest income increased by 22%
from $1.3 million in the third quarter of 2000 to $1.5 million for the same
period in 2001. The increase is attributable to service charges and fees
associated with servicing a higher volume of deposit accounts and transactions.
Included in noninterest income for the first nine months of 2001 is nonrecurring
income of $233,000, as a result of a $102,000 gain on the sale of student loans,
a $79,000 gain from the sale of a Small Business Administration loan, and a
$52,000 gain on the sale of securities available for sale. Included in
noninterest income for the first nine months of 2000 is nonrecurring income of
$319,000, comprised of an $87,000 gain on the sale of student loans and a
$232,000 gain from the sale of Small Business Administration loans. Excluding
these transactions, recurring core noninterest income for the first nine months
of 2001 totaled $4.7 million as compared to $3.6 million for the first nine
months of 2000, an increase of 30%. The increase is mainly attributable to
additional service charges and fees associated with servicing a higher volume of
deposit accounts and transactions.
11
Noninterest Expenses
For the third quarter of 2001, noninterest expenses increased by $922,000, or
22%, over the same period in 2000. Staffing levels and related expenses
increased as a result of servicing more deposit and loan customers and
processing a higher volume of transactions. Staffing and occupancy expenses also
increased as a result of opening three branch offices in June 2000, October
2000, and March 2001, respectively. In addition, staffing and occupancy expenses
increased in preparation for the October 2001 branch opening. A comparison of
noninterest expense for certain categories for the three months ended September
30, 2001, and September 30, 2000, is presented in the following paragraphs.
Salary expenses and employee benefits, which represent the largest component of
noninterest expenses, increased by $472,000, or 24%, for the third quarter of
2001 over the third quarter of 2000. This increase is consistent with increases
in staff levels necessary to handle Company growth from third quarter 2000 to
third quarter 2001, including the additional staff of the branch offices opened
in June 2000, October 2000, March 2001, and October 2001.
Occupancy expenses of $542,000 were $82,000, or 18%, higher for the third
quarter of 2001 than for the three months ended September 30, 2000. Increased
occupancy expenses primarily are a result of the two branch offices opened in
2000 and one branch opened in 2001. The Bank also opened a loan production
office in Carlisle, PA on January 2, 2001. The Bank leases the office space and
constructed leasehold improvements at its own expense.
Furniture and equipment expenses of $335,000 were $42,000, or 14%, higher for
the third quarter of 2001 than the three months ended September 30, 2000. This
increase was the result of higher levels of depreciation costs for furniture and
equipment incurred with the addition of the two branch offices opened in 2000,
the branch opened in 2001, and the Carlisle loan production office opened in
2001, as well as the upgrade of computer equipment at all Commerce locations
during the fourth quarter of 2000 and the first quarter of 2001.
Advertising and marketing expenses totaled $410,000 for the three months ended
September 30, 2001, an increase of $47,000, or 13% from the third quarter of
2000. This increase was primarily the result of increased advertising efforts in
each of the Company's markets. These markets will continue to expand as the
branch network grows.
Data processing expenses of $351,000 were $105,000, or 43%, higher in the third
quarter of 2001 than the three months ended September 30, 2000. The increase was
due to a combination of increased costs associated with processing additional
transactions (due to growth in number of accounts) and an increase in data
processing support costs.
Postage and supplies expense of $228,000 represented a $58,000, or 34%, increase
over the third quarter of the prior year. This was due to a combination of
increased usage of supplies with the addition of three new branches and due to
growth in the volume of customers and customer transaction statements.
Audits and regulatory fees increased by $13,000, or 15%, from $89,000 for the
third quarter of 2000 to $102,000 for the third quarter of 2001. This increase
is a result of higher Federal Deposit Insurance Corporation (FDIC) and Office of
the Comptroller of the Currency (OCC) assessments. Both assessment calculations,
which are based upon deposit size, continue to increase as the
12
Company's deposit balances grow.
Other noninterest expenses increased by $103,000, or 15%, for the three-month
period ended September 30, 2001, as compared to the same period in 2000.
Components of the increase include correspondent bank charges due to increases
in transaction volume and checkbook printing. It also includes costs associated
with processing coin for Penny Arcade Coin counters, installed in 2000, which is
offered at no charge to all customers and non-customers.
For the first nine months of 2001, total noninterest expenses increased by $3.2
million, or 26% over the comparable period in 2000. A comparison of noninterest
expense for certain categories for these two periods is discussed below.
Salary expense and employee benefits increased by $1.6 million, or 30%, over the
first nine months of 2000. The increase was due to normal increases and
additional salary and benefits costs due to an increase in the level of
full-time equivalent employees from 231 at September 30, 2000 to 301 at
September 30, 2001 including the addition of new staff to operate the new
branches opened in June 2000, October 2000, March 2001, and October 2001.
Occupancy and furniture & equipment expenses for the first nine months of 2001
were $575,000, or 28%, higher for the first nine months of 2001 over the similar
period in 2000. The increase is the result of costs associated with the opening
of new branch offices and the addition of the Carlisle LPO which occurred during
the past 12 months as well as the upgrade of computer equipment at all Commerce
locations during the fourth quarter of 2000 and the first quarter of 2001.
Data processing expenses increased $258,000, or 36%, for the first nine months
of 2001 as compared to the first nine months of 2000. The increase in data
processing is the result of increased costs associated with processing higher
volumes of customer transactions along with the increase in data processing
support costs.
Postage and office supplies increased $146,000, or 30%, over the first nine
months of 2000. The increase in postage expenses resulted from the growth in
number of account statements mailed to customers. The increase in supplies
expense is a result of increased usage of such items related to additional staff
levels as well as an increase in the number of accounts serviced.
Audit and regulatory fees increased by $40,000, or 15%, for the first nine
months of 2001 over the same period in 2000. This increase is a result of higher
Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of
the Currency (OCC) assessments, both of which are calculated on levels of
deposits.
Other noninterest expenses for the first nine months of 2001 were $2.3 million
compared to $1.7 million for the similar period in 2000. Telephone expenses
increased $87,000 due to added telephone service for four new locations along
with an increase in call volume. Loan expenses increased $39,000 over the first
nine months in 2000, as a result of the increase in volume in the loan
portfolio. Correspondent bank charges increased $38,000 due to increases in
transaction volume. Costs associated with processing coin for Penny Arcade Coin
counters, installed in 2000, which is offered at no charge to all customers and
non-customers, increased $32,000 over the first nine months of 2000. The
remaining increase was associated with other general costs over similar expenses
during the first nine months of 2000.
13
One key measure used to monitor progress in controlling overhead expenses is the
ratio of net noninterest expenses to average assets. Net noninterest expenses
equal noninterest expenses (excluding other real estate expenses) less
noninterest income (exclusive of nonrecurring gains), divided by average assets.
This ratio equaled 2.58% for the three months ended September 30, 2001, less
than the 2.65% reported for the three months ended September 30, 2000, and 2.68%
for the nine months of 2001 compared to 2.74% for the first nine months of 2000.
Another productivity measure is the operating efficiency ratio. This ratio
expresses the relationship of noninterest expenses (excluding other real estate
expenses) to net interest income plus noninterest income (excluding nonrecurring
gains). For the quarter ended September 30, 2001, the operating efficiency ratio
was 70.3%, compared to 72.5% for the similar period in 2000. For the nine months
ended September 30, 2001, this ratio was 73.3% compared to 73.1% for the nine
months ended September 30, 2000.
Provision for Federal Income Taxes
The provision for federal income taxes was $592,000 for the third quarter of
2001 as compared to $472,000 for the same period in 2000. For nine months ended
September 30, the provision was $1.6 million and $1.3 million for 2001 and 2000,
respectively. The effective tax rate, which is the ratio of income tax expense
to income before income taxes, was 33.3% for the first nine months of 2001 and
33.2% for the same period in 2000.
Net Income and Net Income Per Share
Net income for the third quarter of 2001 was $1.2 million, an increase of
$167,000, or 16%, over the $1.0 million recorded in the third quarter of 2000.
The increase was due to an increase in net interest income of $1.2 million, an
increase in noninterest income of $150,000, offset partially by an increase in
noninterest expenses of $922,000, an increase of $150,000 in the provision for
loan losses, and an increase of $120,000 in the provision for income taxes.
Net income for the first nine months of 2001 was $3.2 million as compared to
$2.7 million recorded in the first nine months of 2000. The increase was due to
an increase in net interest income of $3.2 million, an increase in noninterest
income of $1.0 million, offset partially by an increase in noninterest expenses
of $3.2 million, an increase of $240,000 in the provision for loan losses, and
an increase of $268,000 in the provision for income taxes.
Basic earnings per common share, after adjusting for a 5% common stock dividend
paid in February 2001, increased to $0.66 per common share for the third quarter
of 2001 compared to $0.57 for the same period in 2000. Diluted earnings per
common share were $0.59 for the third quarter of 2001 and $0.53 for the same
period in 2000.
Basic earnings per common share, for the first nine months of the year, after
adjusting for a 5% common stock dividend paid in February 2001, increased to
$1.77 per common share for the first nine months of 2001 compared to $1.49 per
common share for the comparable period in 2000, a 19% increase. Diluted earnings
per common share were $1.60 for the first nine months of 2001 and $1.40 for the
same period in 2000, a 14% increase.
14
Return on Average Assets and Average Equity
Return on average assets (ROA) measures the Company's net income in relation to
its total average assets. The Company's annualized ROA for the third quarter of
2001 was 0.86% as compared to 0.92% for the third quarter of 2000. The ROA for
the first nine months of 2001 and 2000 was 0.81% and 0.87%, respectively. For
purposes of calculating ROA, average assets have been adjusted to exclude gross
unrealized appreciation or depreciation on securities available for sale.
Return on average equity (ROE) indicates how effectively the Company can
generate net income on the capital invested by its stockholders. ROE is
calculated by dividing net income by average stockholders' equity. For purposes
of calculating ROE, average stockholders' equity includes the effect of
unrealized appreciation or depreciation, net of income taxes, on securities
available for sale. The annualized ROE for the third quarter of 2001 was 15.30%,
as compared to 17.43% for the third quarter of 2000. The annualized ROE for the
first nine months of 2001 was 14.62%, as compared to 16.49% for the first nine
months of 2000.
FINANCIAL CONDITION
Securities
During the first nine months of 2001, securities available for sale increased by
$15.9 million (net of unrealized appreciation) from $92.9 million at December
31, 2000 to $108.8 million at September 30, 2001. This resulted from the
purchase of $50.0 million in securities, offset by $28.9 million in principal
repayments, and $7.5 million of securities sold. The portfolio also had an
unrealized gain of $1.6 million in the first nine months of 2001. During the
first quarter, Bank management implemented a small portfolio restructuring
strategy in response to the dramatic decrease in interest rates during the
quarter. Management sold $7.5 million of 7.00% and 7.50% coupon mortgage-backed
securities (MBS's) and replaced these with 6.00% and 6.50% coupon MBS's to
partially mitigate the Bank's risk to prepayments on the higher coupon
securities. The sale of these securities resulted in a net pre-tax gain of
$52,180.
The securities available for sale portfolio is comprised of U.S. Treasury Notes,
U.S. Government agency securities, mortgage-backed securities, AAA Whole Loan
CMO securities, trust preferred debt securities, and equity securities. The
weighted average life of the securities available for sale portfolio was 6.5
years at September 30, 2001 with a weighted average yield of 6.44%.
During the first nine months of 2001, securities held to maturity increased from
$33.8 million to $80.4 million primarily as a result of the purchase of $59.8
million in securities, offset by principal repayments of $13.2 million. The
securities held in this portfolio include U.S. Government agency securities,
tax-exempt municipal bonds, AAA Whole Loan CMO securities, trust preferred debt
securities, corporate debt securities, and mortgage-backed securities. The
weighted average life of the securities held to maturity portfolio was 8.1 years
at September 30, 2001 with a weighted average yield of 6.68%.
Federal funds sold decreased by $11.0 million during the first nine months of
2001. Total securities and federal funds sold aggregated $201.0 million at
September 30, 2001, and represented 34% of total assets.
The average yield on the combined securities portfolio for the first nine months
of 2001 was 6.61%,
15
as compared to 6.71% for the similar period of 2000. The average yield earned on
federal funds sold during the first nine months of 2001 was 4.61%, down 181
basis points from 6.42% earned during the first nine months of 2000. The
decrease in the yield on federal funds sold is a result of eight decreases in
short-term interest rates by the Federal Reserve Bank for a total of 350 bps
between January 1, 2001 and September 30, 2001.
Loans Held for Sale
Loans held for sale are comprised of student loans, Small Business
Administration loans, and residential mortgage loans which the Company
originates with the intention of selling in the future. During the first nine
months of 2001, total loans held for sale increased by $1.2 million, from $5.3
million at December 31, 2000 to $6.5 million at September 30, 2001. The change
was the result of the sale of $6.8 million of student loans, the sale of $3.2
million of Small Business Administration loans, and the sale of $32.6 million of
residential loans, offset by originations of $43.8 million in new loans held for
sale. Loans held for sale represented 1% of total assets at December 31, 2000
and at September 30, 2001.
Loans Receivable
During the first nine months of 2001, total loans receivable increased by $34.5
million from $290.3 million at December 31, 2000, to $324.7 million at September
30, 2001. Loans receivable represented 60% of total deposits and 55% of total
assets at September 30, 2001, as compared to 65% and 60%, respectively, at
December 31, 2000.
Loan and Asset Quality and Allowance for Loan Losses
Total nonperforming assets (nonperforming loans and other real estate, excluding
loans past due 90 days or more and still accruing interest) at September 30,
2001, were $1.2 million, or 0.21%, of total assets as compared to $875,000, or
0.18%, of total assets at December 31, 2000. Other real estate owned totaled
$12,000 at September 30, 2001, and $42,000 as of December 31, 2000.
16
The summary table below presents information regarding nonperforming loans and
assets as of September 30, 2001 and 2000 and December 31, 2000.
Nonperforming Loans and Assets
- ------------------------------------------------------------------------------------------------
(dollars in thousands) September 30, December 31, September 30,
2001 2000 2000
- ------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 348 $ 300 $ 0
Consumer 61 162 160
Real estate:
Construction 0 0 0
Mortgage 808 371 180
- ----------------------------------------------------------------------------------------------
Total nonaccrual loans 1,217 833 340
Restructured loans 0 0 0
- ----------------------------------------------------------------------------------------------
Total nonperforming loans 1,217 833 340
Other real estate 12 42 42
- ----------------------------------------------------------------------------------------------
Total nonperforming assets 1,229 875 382
- ----------------------------------------------------------------------------------------------
Loans past due 90 days or more 4 0 53
- ----------------------------------------------------------------------------------------------
Total nonperforming assets and
Loans past due 90 days or more $ 1,233 $ 875 $ 435
- ----------------------------------------------------------------------------------------------
Nonperforming loans to total loans 0.37% 0.29% 0.12%
Nonperforming assets to total assets 0.21% 0.18% 0.08%
==============================================================================================
The following table sets forth information regarding the Company's provision and
allowance for loan losses.
Allowance for Loan Losses
- ----------------------------------------------------------------------------------------------
(dollars in thousands) 9 Months
Ending Year Ending
September 30, December 31,
2001 2000
- ----------------------------------------------------------------------------------------------
Balance at beginning of period $ 3,732 $ 2,841
Provisions charged to operating expenses 1,005 1,050
- ----------------------------------------------------------------------------------------------
4,737 3,891
Recoveries of loans previously charged-off:
Commercial 3 6
Consumer 21 8
Real estate 0 0
- ----------------------------------------------------------------------------------------------
Total recoveries 24 14
Loans charged-off:
Commercial 197 1
Consumer 89 95
Real estate 24 77
- ----------------------------------------------------------------------------------------------
Total charged-off 310 173
- ----------------------------------------------------------------------------------------------
Net charge-offs 286 159
- ----------------------------------------------------------------------------------------------
Balance at end of period $ 4,451 $ 3,732
- ----------------------------------------------------------------------------------------------
Net charge-offs as a percentage of
Average loans outstanding 0.09% 0.06%
- ----------------------------------------------------------------------------------------------
Allowance for loan losses as a percentage of
Period-end loans 1.37% 1.29%
==============================================================================================
17
Deposits
Total deposits at September 30, 2001 were $538.0 million, up $91.5 million, or
20%, over total deposits of $446.6 million at December 31, 2000. The average
balances and weighted average rates paid on deposits for the first nine months
of 2001 and 2000 are presented in the following table.
- ----------------------------------------------------------------------------------------------
Nine Months Ended September 30,
2001 2000
- ----------------------------------------------------------------------------------------------
Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate
- ----------------------------------------------------------------------------------------------
Demand deposits:
Noninterest-bearing $ 88,738 $ 70,395
Interest-bearing (money
market and checking) 101,300 2.50% 75,218 3.10%
Savings 134,303 3.20 104,560 3.86
Time deposits 160,667 5.65 127,945 5.34
- ----------------------------------------------------------------------------------------------
Total deposits $ 485,008 $ 378,118
==============================================================================================
Interest Rate Sensitivity
The management of interest rate sensitivity seeks to avoid fluctuating net
interest margins and to provide consistent net interest income through periods
of changing interest rates.
The Company's risk of loss arising from adverse changes in the fair value of
financial instruments, or market risk, is composed primarily of interest rate
risk. The primary objective of the Company's asset/liability management
activities is to maximize net interest income while maintaining acceptable
levels of interest rate risk. The Company's Asset/Liability Committee (ALCO) is
responsible for establishing policies to limit exposure to interest rate risk,
and to ensure procedures are established to monitor compliance with those
policies. The guidelines established by ALCO are reviewed by the Company's Board
of Directors.
An interest rate sensitive asset or liability is one that, within a defined
period, either matures or experiences an interest rate change in line with
general market interest rates. Historically, the most common method of
estimating interest rate risk was to measure the maturity and repricing
relationships between interest-earning assets and interest-bearing liabilities
at specific points in time (GAP), typically one year. Under this method, a
company is considered liability sensitive when the amount of its
interest-bearing liabilities exceeds the amount of its interest-earning assets
within the one year horizon. However, assets and liabilities with similar
repricing characteristics may not reprice at the same time or to the same
degree. As a result, the Company's GAP does not necessarily predict the impact
of changes in general levels of interest rates on net interest income.
Management believes the simulation of net interest income in different interest
rate environments provides a more meaningful measure of interest rate risk.
Income simulation analysis captures not only the potential of all assets and
liabilities to mature or reprice, but also the probability that they will do so.
Income simulation also attends to the relative interest rate sensitivities of
these items, and projects their behavior over an extended period of time.
Finally, income simulation permits management to assess the probable effects on
the balance sheet not only of changes in interest rates, but also of proposed
strategies for responding to them.
18
The Company's income simulation model analyzes interest rate sensitivity by
projecting net interest income over the next 24 months in a flat rate scenario
versus net income in alternative interest rate scenarios. Management continually
reviews and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Company's model projects a
proportionate 200 basis point change during the next year, with rates remaining
constant in the second year.
The Company's ALCO policy has established that income sensitivity will be
considered acceptable if overall net income volatility in a plus or minus 200
basis point scenario is within 15% of net income in a flat rate scenario in the
first year and 30% using a two year planning window. At September 30, 2001, the
Company's income simulation model indicates net income would decrease 0.8% in
the first year and 2.1% over a two year time frame if rates decreased as
described above. The model projects that net income would decrease by 0.8% in
the first year and increase 0.9% over a two year time frame if rates increased
as described above. All of these forecasts are within an acceptable level of
interest rate risk per the policies established by ALCO.
Management also monitors interest rate risk by utilizing a market value of
equity model. The model assesses the impact of a change in interest rates on the
market value of all the Company's assets and liabilities, as well as any off
balance sheet items. The model calculates the market value of the Company's
assets and liabilities in excess of book value in the current rate scenario, and
then compares the excess of market value over book value given an immediate 200
basis point change in rates. The Company's ALCO policy indicates that the level
of interest rate risk is unacceptable if the immediate 200 basis point change
would result in the loss of 60% or more of the excess of market value over book
value in the current rate scenario. At September 30, 2001, the market value of
equity model indicates an acceptable level of interest rate risk.
Liquidity
Liquidity management involves the ability to generate cash or otherwise obtain
funds at reasonable rates to support asset growth and reduce assets to meet
deposit withdrawals, to maintain reserve requirements, and to otherwise operate
the Company on an ongoing basis. Liquidity needs are generally met by converting
assets into cash or obtaining sources of additional funding, mainly deposits.
Liquidity sources from asset categories are provided primarily by cash and
federal funds sold, and the cash flow from the amortizing securities and loan
portfolios. The primary source of liquidity from liability categories is the
generation of additional core deposit balances.
Additionally, the Company has established secondary sources of liquidity
consisting of federal funds lines of credit, repurchase agreements, and
borrowing capacity at the Federal Home Loan Bank, which can be drawn upon if
needed. As of September 30, 2001, the total potential liquidity for the Company
through these secondary sources was $150 million. In view of the primary and
secondary sources as previously mentioned, management believes that the Company
is capable of meeting its anticipated liquidity needs.
Capital Adequacy
At September 30, 2001, stockholders' equity totaled $31.9 million, up 19.8% over
stockholders' equity of $26.7 million at December 31, 2000. Stockholders' equity
at September 30, 2001 included $912,000 unrealized gain, net of income taxes, on
securities available for sale. Excluding this
19
unrealized gain, gross stockholders' equity increased by $3.7 million from $27.3
million at December 31, 2000, to $31.0 million at September 30, 2001 due
principally to retained net income.
On June 15, 2000, the Company issued $5.0 million of 11.00% Trust Capital
Securities to Commerce Bancorp, Inc. through Commerce Harrisburg Capital Trust
I, a newly formed Delaware business trust subsidiary of the Company. Proceeds of
this offering were downstreamed to Commerce Bank/Harrisburg, N.A., the Company's
wholly-owned banking subsidiary, to be used for additional capitalization
purposes. All $5.0 million of the Trust Capital Securities qualify as Tier 1
capital for regulatory capital purposes.
On September 28, 2001, the Company issued $8.0 million of 10.00% Trust Capital
Securities to Commerce Bancorp, Inc. through Commerce Harrisburg Capital Trust
II, a newly formed Delaware business trust subsidiary of the Company. Proceeds
of this offering were downstreamed to Commerce Bank/Harrisburg, N.A., the
Company's wholly-owned banking subsidiary, to be used for additional
capitalization purposes. At September 30, 2001, $5.3 million of the Trust
Capital Securities qualify as Tier 1 capital for regulatory capital purposes and
the remaining $2.7 million qualifies as Tier 2 capital.
Risk-based capital provides the basis for which all banks are evaluated in terms
of capital adequacy. The risk-based capital standards require all banks to have
Tier 1 capital of at least 4% and total capital, including Tier 1 capital, of at
least 8% of risk-adjusted assets. Tier 1 capital includes common stockholders'
equity and qualifying perpetual preferred stock together with related surpluses
and retained earnings. Total capital may be comprised of total Tier 1 capital
plus limited life preferred stock, qualifying debt instruments, and the
allowance for loan losses.
The following table provides a comparison of the Company's risk-based capital
ratios and leverage ratios to the minimum regulatory requirements for the
periods indicated:
- ------------------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
Under Prompt
September 30, December 31, For Capital Adequacy Corrective Action
2001 2000 Purposes Provisions
- ------------------------------------------------------------------------------------------------------------------------
Risk-Based Capital Ratios:
Tier 1 10.24% 9.90% 4.00% 6.00%
Total 12.00 11.04 8.00 10.00
Leverage Total 7.58 6.92 4.00 5.00
- ------------------------------------------------------------------------------------------------------------------------
At September 30, 2001, the consolidated capital levels of the Company and of the
subsidiary bank (Commerce) met the definition of a "well capitalized"
institution.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk principally includes interest rate risk,
which is discussed in the Management's Discussion and Analysis section above.
While the fed funds rate and National Prime fell 350 basis points between
December 31, 2000 and September 30, 2001, the Company's net interest margin has
remained fairly stable. Commerce's net interest margin for the third quarter
2001 was 4.49%, up 10 basis points over 4.39% for the third quarter 2000. Also,
the net interest margin for the first nine months of 2001 was 4.42%, down only
12 basis points from 4.54% for the same period in 2000.
Currently, Commerce has 72% of its deposits in non-interest bearing, interest
checking, and saving accounts, which it considers core deposits. Because of
this, these accounts have historically contributed significantly to the net
interest margin.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to certain routine legal proceedings and claims arising
in the ordinary course of business. It is management's opinion the ultimate
resolution of these claims will not have a material adverse effect on the
Company's financial position and results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
Computation of Net Income Per Share...................................Exhibit 11
(b.) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 2001.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf be the
undersigned thereunto duly authorized.
PENNSYLVANIA COMMERCE BANCORP, INC.
(Registrant)
11/14/01 /s/ James T. Gibson
- ------------------------- ---------------------------------------------
(Date) James T. Gibson
President/CEO
11/14/01 /s/ Mark A. Zody
- ------------------------- ---------------------------------------------
(Date) Mark A. Zody
Executive Vice President
Chief Financial Officer
23